Economic growth will keep rate hikes coming

New Zealand's economy grew at a 3.3 per cent rate in the year through March, the fastest pace in eight years, supporting the central bank's view that it must press on with interest rate increases to keep inflation at bay.

The economy grew at a 1 per cent pace in the first three months of the year, from an upwardly revised 1 per cent gain in the fourth quarter, marking three quarters of growth at 1 per cent or above, Statistics NZ said. Quarterly growth was below the Reserve Bank's 1.1 per cent expectation and the 1.2 per cent expected in a Reuters poll of economists although the annual rate beat the Reuters forecast for 3.1 per cent.

New Zealand's economic expansion in the latest quarter was helped by a 12.5 per cent rise in construction, which accounted for two-thirds of GDP growth and marked its largest increase in 14 years.

Last week, the Reserve Bank hiked the official cash rate by a quarter point to 3.25 per cent and said the economy's expansion had "considerable momentum", raising its estimate for growth in the first half of the year to 4 per cent from 3.5 per cent.

"While the headline was a bit softer than we or the Reserve Bank had expected, taking revisions to previous quarters into account, today's result still suggests that the economy had developed considerable momentum at the start of the year," Westpac senior economist Michael Gordon said in a note.

"Today's numbers will do nothing to dissuade the Reserve Bank from its intention to continue hiking the OCR in its July review."

New Zealand's central bank is expected to deliver another two rate rises this year, according to a Reuters poll of economists.

Nine of 13 economists expect the next rise to come in July. The New Zealand dollar fell to 87.17 US cents from 87.34 cents immediately before the report was released at 10:45am. The trade-weighted index eased to 81.11 from 81.25. Some currency traders had bet the quarterly GDP report could exceed expectations at 1.4 per cent.

Growth in construction was strong in Canterbury, and the rest of the country, the statistics agency said. Construction has surged in Christchurch as the city is being rebuilt following a series of earthquakes.

Westpac's Gordon said he expects a "slightly slower" pace of GDP growth in the June quarter, as the first quarter's "monster" ramp-up in construction is unlikely to be repeated and some monthly indicators have slowed recently.

Mining was the second-largest contributor to growth in the quarter, up 6.3 per cent, the agency said. The rise was driven by oil and gas extraction activity which marked its largest quarterly growth since the December 2007 quarter, it said.